Is a “personal” annuity taxed differently to the claimant than a structured settlement annuity?
Yes. Structured settlement annuities pay benefits to the claimant income tax free forever. Personal annuity payouts are subject to the so-called “exclusion ratio” of IRC Section 72. The exclusion ratio is calculated at the time the personal annuity is purchased from the life insurance company. It is derived by dividing the “investment” (the premium paid) in the contract by the total expected payout. The exclusion ratio is then multiplied by the annual annuity payment. The result is the portion excludable from taxation. The difference is the amount subject to annual taxation. Owners of personal annuities receive IRS Form 1099s from the life insurance company each year that state the ratio and supply the amount of annual payment that must be included in the recipient’s income tax return.
